The Dodd-Frank Act provides the Consumer Financial Protection Bureau (“CFPB”) with authority to obtain a broad range of legal and equitable remedies, as well as civil money penalties. 12 U.S.C. § 5565. A recent opinion from the 7th Circuit in CFPB v. Consumer First Legal Group, LLC (“CFLG”) provides critical judicial guideposts for how and when these remedies apply. The court’s opinion should play an important role in future CFPB enforcement actions.
The case involved claims against two law firms and related individuals who provided mortgage assistance relief services to consumers. The CFPB alleged that the defendants violated Regulation O, 12 C.F.R. part 1015, by charging consumers up-front fees, making deceptive representations about their services and failing to provide required disclosures. Importantly, Regulation O (like the Dodd-Frank Act itself) contains an exemption for attorneys practicing law under certain circumstances. In a holding relevant to its discussion of remedies, the appellate court held that because defendants’ activities did not constitute the practice of law under the circumstances, the attorney exemptions did not apply. The court thus upheld the district court’s finding of liability.
Turning to remedies, however, the appellate court parted ways with the district court (and the CFPB) on several important points.
First, relying on the Supreme Court’s recent decision in Liu v. SEC, 140 S. Ct. 1936 (2020), the court held that the CFPB’s authority to obtain restitution runs only to a defendant’s net profits and not to its net revenues. The court rejected the CFPB’s argument that Liu is only applicable to claims of “disgorgement,” finding instead that “Liu’s reasoning is not limited to disgorgement; instead, the opinion purports to set forth a rule applicable to all categories of equitable relief, including restitution.”1 In the case at hand, the district court had ordered restitution based on the defendants’ net revenues—gross receipts minus any refunds issued. Instead, applying Liu, the appellate court remanded the case for determination of defendants’ net profits—gross receipts minus refunds and expenses. This same issue has been raised in another CFPB enforcement action pending on appeal in the Ninth Circuit (the CashCall matter discussed below). To the extent that other courts follow CFLG, the court’s holding is likely to have significant ramifications for many CFPB enforcement cases, as the agency often seeks consumer restitution as a remedy. (As we’ve previously noted (here and here), in at least two other cases, district courts have rejected the CFPB’s blanket requests for restitution on the grounds that not all consumers were impacted by the conduct found to be unlawful.)
Second, the CFLG court made two important holdings regarding the calculation of civil money penalties (“CMPs”) in CFPB enforcement actions. The Dodd-Frank Act authorizes the CFPB to obtain three levels of CMPs “for each day during which [a] violation … continues” depending on the defendant’s culpability—strict liability violations ($5,000/day), reckless violations ($25,000/day) and knowing violations ($1,000,000/day). Given the disparity in penalty amounts, the culpability determination is critical.
The district court in CFLG had concluded that several of the defendants had committed reckless violations and calculated CMPs accordingly. The court of appeals reversed this determination. The court noted that “[a] defendant acts recklessly when his conduct involves ‘an unjustiﬁably high risk of harm that is either known or so obvious that it should be known’” (quoting Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 68–69 (2007)). The court then clarified that where, as here, the conduct at issue is not obviously wrongful, dangerous or illegal on its face, the recklessness determination is to be made with respect to the illegality of the conduct and not with respect to the facts constituting the offense. That is, the question is not whether defendants were reckless in how they acted but whether they were reckless in ignoring the illegality of the conduct at issue. Applying this standard, the appellate court noted that although the district court concluded that the defendants’ conduct was not covered by the attorney exemptions in the Dodd-Frank Act and Regulation O, and that the defendants were therefore subject to the regulations at issue, “the question was a legitimate one.” Accordingly, the court concluded that the defendants were not aware of “an unjustiﬁably high or obvious risk of violating” the law and therefore had not committed a reckless violation. The CFLG court’s decision mirrors the decision of the district court in the CFPB’s enforcement action against CashCall, in which the court rejected the CFPB’s request for CMPs based on the recklessness standard. In that case, the district court relied heavily on the novelty of the CFPB’s claim in rejecting a finding of recklessness, noting that it was not until the court’s ruling on liability that the defendants could have known they were violating the law and that “[a]t best, the CFPB established that Defendants were willing to accept the business risks associated with structuring a lending model that would avoid relevant state and federal laws and employed legal counsel to assist with this endeavor.” CashCall is currently on appeal to the Ninth Circuit, where the CFPB has argued for reversal of this aspect of the district court’s finding, so additional appellate guidance on this point may be forthcoming.
The second aspect of the CFLG’s CMP decision is equally important and addresses how to calculate a penalty amount. As noted above, the Dodd-Frank Act sets the penalty amount on a “per day” basis. In CFLG, there was a dispute as to the time period during which defendants enrolled consumers in their services in violation of Regulation O. The district court looked to the last date any consumer was enrolled (the “last date”) and calculated penalties based on the entire time period through that last date. The appellate court, however, noted that there was no evidence that any enrollments occurred on many of the days leading up to that last date and that those no-violation days should not be counted toward the penalty calculation merely because a violation may have occurred on a later date. That is, CFLG stands for the proposition that penalties are only appropriate for days on which actual violations occurred and not for an entire time period during which a particular policy or practice was in effect if no actual violations occurred on certain dates. This more nuanced approach to penalty calculation will have important ramifications for both litigated cases and settlements in which the CFPB seeks the maximum applicable penalty amount.
Finally, the CFLG court also rejected the breadth of injunctive relief entered by the district court. The district court had banned the individual defendants from providing any “debt relief services.” Noting that an injunction “cannot be ‘more burdensome to the defendant than necessary to accord complete relief to the plaintiffs’” (quoting Califano v. Yamasaki, 442 U.S. 682, 702 (1979)), the appellate court narrowed the scope of the injunction to cover only mortgage-relief services. Several factors drove the court’s decision in this regard—that the violations at issue only concerned mortgage-relief services, that defendants had not acted recklessly and that defendants’ operations “were not a complete scam: at the end of the day, [defendants] did in fact obtain loan modiﬁcations for hundreds of customers during their roughly two years of operation.” The court’s decision in this regard was again reminiscent of the district court’s decision in CashCall, where the district court rejected the agency’s restitution demand in part because the CFPB “did not show that Defendants intended to defraud consumers or that consumers did not receive the benefit of their bargain.” The CFLG court’s opinion provides important benchmarks for consideration in negotiating (or litigating) the scope of any injunctive relief in CFPB enforcement cases.
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The CFPB has been largely successful in its enforcement litigation, usually prevailing on the merits of its claims. But the CFLG decision is the latest in a series of court decisions (and the first appellate decision) to reject the CFPB’s broad remedial claims in such cases. As additional litigated cases are resolved or appealed, we expect additional judicial guidance on the scope and implementation of the broad remedial tools available to the CFPB.