The Ninth Circuit recently considered arguments relating to an enforcement action brought by the Consumer Financial Protection Bureau (CFPB) against a California attorney who was offering loan modification services. The CFPB sought disgorgement and restitution against the defendant for approximately $11.4 million dollars that he and related parties collected from consumers between January 2010 and July 2012.
In CFPB v. Gordon, the Ninth Circuit first addressed whether the court had jurisdiction to hear the case, noting that President Obama had appointed Richard Cordray as the CFPB's initial director on January 4, 2012, relying on his recess-appointment power. That same day, President Obama made three recess appointments to the National Labor Relations Board (NLRB). The U.S. Supreme Court later held that the NLRB appointments did not satisfy the Appointments Clause set forth in Article II because they occurred when the Senate was in session. The President renominated Mr. Cordray as Director on January 24, 2013. On July 16, 2013, the Senate confirmed Mr. Cordray, and on August 30, 2013, Mr. Cordray claimed "the actions I took during the period I was serving as a recess appointee were legally authorized and entirely proper."
The CFPB filed its enforcement action against the defendant during the period that Mr. Cordray was serving as Director pursuant to his recess appointment. In addressing the constitutionality of the CFPB's action, the Ninth Circuit held the recess appointment neither divested the federal courts of jurisdiction nor rendered the enforcement action invalid under Article II.
We discussed the constitutional issues in greater detail last week in the CFPB Monitor, including Judge Ikuta's dissenting opinion. In short, the Ninth Circuit reasoned that Congress had authorized the CFPB to bring actions in federal court to enforce consumer protection statutes and regulations, and Mr. Cordray's recess appointment did not alter the Executive Branch's interest or power in having federal law enforced. The court concluded that Mr. Cordray's recess appointment did not negate Article III jurisdiction, and that his later, valid appointment, coupled with the August 30, 2013 ratification, cured any Article II deficiencies that may have existed.
With respect to the merits, the CFPB alleged that the defendant violated the Consumer Financial Protection Act's prohibition against unfair, deceptive, and abusive acts and practices (UDAAP) by claiming that consumers would likely receive mortgage relief and that his operation was affiliated with the government. The CFPB further alleged the defendant violated Regulation O by receiving up-front payments for mortgage relief services before consumers had entered into agreements with their lenders, failing to make proper disclosures, advising consumers not to communicate with their lenders, and misrepresenting his services.
The Ninth Circuit affirmed the district court's finding that the defendant's mailers falsely claimed he was affiliated with the federal government. Each mailer bore the Equal Housing Opportunity logo and stated it was a "Notice of HUD Rights" sent from the "Qualifications Intake Department." The defendant argued he was not liable for the mailers because he had hired another company to create his marketing materials. The court rejected this argument because evidence showed the defendant had retained final decision-making authority over all advertisement and had reviewed the mailers in question. The defendant also argued that the contracts his clients eventually signed contained no misrepresentations as to his services and affiliations and therefore absolved him of any liability for the mailers. The Ninth Circuit rejected this argument, ruling that a &"later corrective written agreement does not eliminate a defendant's liability for making deceptive claims in the first instance.&"
As for the CFPB's other claims, the defendant argued that he was not a "mortgage assistance relief service provider" under Regulation O because he did not provide mortgage relief services in exchange for consideration. Instead, he claimed that he simply provided &"custom legal products,&" and that any mortgage relief services he provided were part of a pro bono program. The Ninth Circuit observed that consumers were not eligible for these "pro bono" services unless they signed up and paid fees for legal products, and consequently was not persuaded that a contract under which a consumer agrees to pay a fee can be used to escape Regulation O. Ultimately, the Ninth Circuit held that the district court properly granted summary judgment against the defendant, but remanded for further consideration relating to the monetary judgment.
While Gordon involves extreme conduct, it serves as a reminder that attempts to contract around consumer protection laws are risky, particularly when coupled with UDAAP conduct. In addition, the case highlights important constitutional issues surrounding the CFPB that remain unresolved.
