So much to say, so little time. Historically groundbreaking, a federal court in Madison, Wisconsin engaged in the most robust, methodical damages analysis under the Consumer Financial Protection Act, found in Title X of the Dodd-Frank Act, that had ever been undertaken in recent years.
In finding that two defunct mortgage-relief services companies had misrepresented their services to consumers, the court delivered a $59 million judgment, including $21.7 million in restitution for consumers and civil penalties totaling nearly $37.3 million.
This Order was issued last Monday, November 4, 2019. Let me dive into (I) descriptions of what occurred in the case, and then (II) the implications of this ruling for all businesses regulated by the Consumer Financial Protection Bureau.
Regardless of one’s views of the mortgage practices involved, this was a good day for anyone who likes math, given the unprecedented level of numerical precision and analysis underpinning the Court’s order.
I. Dispute in the Case and Approach of the Bureau
The Bureau sued two corporate entities, The Mortgage Law Group LLP and Consumer First Legal Group LLC, and four of their principals, Thomas Macey, Jeffrey Aleman, Jason Searns, and Harold Stafford, alleging that the defendants’ conduct had violated the Mortgage Assistance Relief Services Rule (MARS), which is Regulation O found at 12 C.F.R. Part 1015. Generally, the MARS Rule prohibits deceptive or unfair acts towards consumers purchasing such services, and outlaws the charging of advance fees, i.e., the company may not require the consumer to make payment for services until after the very mortgage-loan or foreclosure-relief services being sold have been provided. A key issue in the case is whether the defendants were immune from liability based on the exemption in the MARS Rule for attorney-provided services.
Notably, this single-plaintiff case was filed on July 22, 2014, but the court order ending the matter was not issued until last week. Why the five-year-and-three-month-long delay? After preliminary motions and discovery throughout 2014 and 2015, the Court granted the Bureau summary judgment as to liability of the principals on July 20, 2016. Trial occurred in late April 2017.
Notwithstanding the Trump administration’s decision to appoint Mick Mulvaney as Acting Director of the Bureau, which the administration claimed was effective November 25, 2017, the Bureau did not elect to withdraw the case.
While the Court had resolved certain liability issues on summary judgment, what remained afterwards were a host of issues concerning the proper remedy, including fairly novel issues regarding penalties and the “recklessness” standard under the CFPA. Post-trial, the parties litigated such issues. On November 15, 2018, just prior to Trump’s appointment of Kathleen Kraninger as permanent Bureau Director, the Court entered an order deciding the remaining factual issues after trial and setting a briefing schedule for damages and injunctive relief. The new leadership of the Bureau, as with the Bureau under Mr. Mulvaney’s tenure, did not elect to withdraw the case.
The post-trial briefing of the parties on remedies concluded in February 2019, which was followed by last week’s Order awarding the Bureau approximately $59 million in combined forms of relief, including restitution to consumers and civil money penalties under the CFPA.
II. Implications for Entities Subject to Bureau Jurisdiction
There are a number of significant implications from this case for all banks and financial services companies overseen by the Bureau.
First, this case demonstrates that even though the Court determined that the misconduct occurred from 2011 to 2013, the Bureau’s Enforcement protocol includes a path by which large restitution and penalty sums can be recovered several years later through protracted federal court litigation.
Second, regardless of whether the bank or financial services company faces an issue under the same regulation (MARS Rule) that was applied here, this case is precedent-setting to all firms engaged in consumer financial services because this Order fleshed out the penalty matrix in the CFPA, which applies in all cases irrespective of the underlying enumerated statute that was violated. Meaning, the Dodd-Frank Act, which has not been amended since its initial passage in 2010, provides for three tiers of civil monetary penalties: (1) $5,000 per day for strict liability acts, (2) $25,000 per day for recklessly committed acts, and (3) $1 million per day for knowing violations.
Since the Bureau’s inception, financial services industry participants have always been privy to the extraordinary high potential penalty maximums set out in the statute. However, the statute also provides for discretion by the Bureau (in negotiated settlement) or by the Court (in litigated matters) to reduce the maximum on the basis of mitigating factors, and very little case precedent existed with respect to assessing civil penalties under the CFPA.
In last week’s Order, however, Judge William M. Conley of the Western District of Wisconsin issued a methodical analysis of each of the mitigating factors — size of the financial resources and good faith of the person charged, gravity of the violation, severity of the risks to or losses of the consumer, history of previous violations, and “such other matters as justice may require.”
For the majority of the factors, including gravity of the violation, lack of good faith, severity of losses to the consumer, etc., the Court held that they “weighed in favor of substantial civil penalties with respect to each of the defendants.”
Third, Judge Conley also engaged in a robust analysis to address when parties’ penalty amounts ought to be adjudicated under the first tier (strict liability) versus under the second tier (recklessly committed). In synthesizing the calculus set forth in the statute, the Court determined with precision the specific dollars awarded for penalties as to each individual principal, based on his role in the specific corporate entities:
- Mr. Macey: $25,000 per day for 538 days for advanced fee violations related to The Mortgage Law Group; $25,000 per day for 358 days for advanced fee violations related to Consumer First Legal Group; $25,000 per day for 532 days for enrollment violations related to The Mortgage Law Group, multiplied by two (for two counts per violation); and $25,000 per day for 155 days for enrollment violations related to Consumer First Legal Group, multiplied by two (for two counts per violation).
- Mr. Aleman: $25,000 per day for 538 days for advanced fee violations related to The Mortgage Law Group; $25,000 per day for 358 days for advanced fee violations related to Consumer First Legal Group; $25,000 per day for 532 days for enrollment violations related to The Mortgage Law Group, multiplied by three (for three counts per violation); and $25,000 per day for 155 days for enrollment violations related to Consumer First Legal Group, multiplied by three (for three counts per violation).
- Mr. Searns: $25,000 per day for 538 days for advanced fee violations related to The Mortgage Law Group; and $25,000 per day for 532 days for enrollment violations related to The Mortgage Law Group, multiplied by three (for three counts per violation).
- Mr. Stafford: $5,000 per day for 47 days.
This case represents one of the few which tangibly demonstrates how astronomically high the penalties can escalate when applying the CFPA penalty matrix in accordance with its literal wording.
Fourth, although the popular press suggests the Bureau enforcement outcomes involve lax financial fines under the current administration, the Order demonstrates facts showing the contrary. Namely, the defendants had argued that zero penalty should be awarded. The court, however, ruled that “Certainly this is not a situation where the defendants’ finances are so limited that only a nominal penalty should be imposed, particularly given the egregious and calculated nature of their violations.”
In fact, the Bureau recommended—and the Court agreed—that the defendants’ maximum penalties (as set out in the bullets above) should be mitigated by the following percentages: Mr. Macey (20%), Mr. Aleman (20%), Mr. Searns (15%), and Mr. Stafford (5%). Following downward adjustment, for the mitigating factors, as recommended by the Bureau, the Court awarded final penalties in the following amounts: $11.35 million against Mr. Macey, $14.79 million against Mr. Aleman, $8 million against Mr. Searns, and $33,250 against Mr. Stafford.
Fifth, this case represents a concrete, numerical manifestation of what results when the Bureau seeks to hold individuals liable for corporate acts. This too is in and of itself a burgeoning area of law, and individuals who are involved in management, operational, or leadership roles of companies that offer consumer financial services may be personally liable for the corporate conduct given the liability-creating provisions and case jurisprudence of the Bureau.
Sixth, the penalties awarded against the defendants were in addition to the Order of restitution. The Court held that “restitution is warranted where consumers (1) were charged advanced fees that were specifically prohibited by regulation; (2) were enticed to do so through various misrepresentations; and (3) received no measurable benefit for payment of those fees.” The Court had also awarded restitution in the amount of $18.7 million with respect to advance fees relating to The Mortgage Law Group (holding the company, Mr. Macey, Mr. Aleman, and Mr. Searns jointly and severally liable); $2.9 million with respect to advance fees by an entity related to Consumer First Legal Group (holding the company, Mr. Macey, Mr. Aleman, and Mr. Searns jointly and severally liable); and $94,730 with respect to advance fees by a second entity related to Consumer First Legal Group (holding the company and Mr. Stafford jointly and severally liable).
In so holding, the Court distinguished two previous CFPB cases in the Central District of California in which that court had held that restitution was an inappropriate remedy. The Court in Madison reasoned that the facts were sharply distinct in this case, because neither of those two California cases involved the MARS Rule or, more operatively, evidence that the defendants acted deliberately to mislead consumers or otherwise evade the law.
Seventh, under applicable rules, and consistent with the Court’s Order, the above millions in restitution and civil penalties constitute monetary obligations which, if not paid as owed, are not dischargeable in bankruptcy.
Next Steps and Constitutional Issue
In closing, the case demonstrates early, clear precedent involving a federal judge’s interpretation of the penalty and restitution powers of the Bureau in the CFPA. Businesses involved in current Bureau investigations or inquiries are well-served by becoming familiar with the practical financial implications of a completed enforcement action, as indicated in this case. The case outcome also represents a concrete example of the agency, during the current administration, continuing to pursue legal actions where it believes an action is warranted and is consistent with the Bureau’s mission, notwithstanding existential concerns in relation to the constitutionality of the Bureau. Indeed, this case serves as a pragmatic reminder that regardless of the constitutional structure of the Bureau, legal or academic debates are hollow comfort to actual businesses facing the Bureau, given the judicial power to apply the penalties matrix and restitution provisions of the CFPA as they are currently written.
We will continue to watch the Bureau enforcement space and report on similarly notable developments as they occur.
 See 12 U.S.C. 5565(c)(2).
 Consumer Fin. Protection Bureau v. The Mortgage Law Group, LLP, et al., No. 3:14-cv-00513-wmc (W.D. Wisc. Nov. 4, 2019), at 18.
 Id. at 8.