Mortgage Banking Update - September 30, 2021
In This Issue:
- President Biden Nominates Alvaro Bedoya to Serve as FTC Commissioner
- This Week’s Podcast: A Conversation with Nicholas Smyth, Senior Deputy Attorney General and Assistant Director for Consumer Financial Protection in the Pennsylvania Office of Attorney General
- Seventh Circuit Vacates Restitution Award to CFPB in Action Against Mortgage-Assistance Relief Companies and Lawyers
- FTC Successfully Uses Section 19 of FTC Act to Obtain Restitution as Alternative to Section 13(b)
- Sixth Circuit Rules Unconstitutionality of 2015 TCPA Amendment Did Not Invalidate Claims for Post-2015 TCPA Violations Not Involving the Collection of Government Debt
- Chopra Nomination to Serve as CFPB Director Advances
- CFPB Issues Report Analyzing Complaint Submission Patterns by Demographic Characteristics
- Looking Ahead
For the latest updates on the Coronavirus COVID-19 pandemic visit the Ballard Spahr COVID-19 Resource Center
On September 13, the White House announced the nomination of Alvaro Bedoya to serve as FTC Commissioner. Mr. Bedoya is slated to fill the seat on the Commission currently held by Rohit Chopra, which Mr. Chopra will vacate upon his confirmation as CFPB Director. Mr. Chopra is expected to be confirmed as CFPB Director before the end of the year.
If confirmed, Mr. Bedoya would join the two other Democratic FTC Commissioners, Lina Khan, Chair of the Commission, and Rebecca Slaughter, and allow Democrats to maintain a 3-2 majority.
Mr. Bedoya is currently a law professor at Georgetown University Law School, where his research has focused on how technologies such as facial recognition have led to discrimination against immigrants and people of color. He was the founding director of Georgetown University’s Center on Privacy & Technology. Mr. Bedoya also served as the first Chief Counsel for the Senate Judiciary Committee’s Subcommittee on Privacy, Technology & the Law. As a result, some observers view Mr. Bedoya’s nomination as a precursor to greater FTC focus on potential discrimination arising from the use of artificial intelligence and other technological innovations as well as privacy considerations for both consumer protection and competition among Big Tech companies.
- Kim Phan
We discuss recent and ongoing enforcement activity of the PA AG involving consumer financial services. Our conversation focuses on activity directed at: auto title lenders for alleged violations of PA usury law; national banks for alleged CARD Act violations; furniture retailers for alleged “hang tag” law violations; home sellers for alleged violations of mortgage laws arising from the use of contracts for deed; and phone scams.
Alan Kaplinsky, Ballard Spahr Senior Counsel, hosts the conversation.
Click here to listen to the podcast.
In a decision issued earlier this summer, the U.S. Court of Appeals for the Seventh Circuit vacated the district court’s order awarding restitution, mandating civil penalties, and issuing an injunction in an action brought by the CFPB against two mortgage-assistance relief companies and four lawyers associated with the companies. The decision imposes significant limitations on the Bureau’s ability to recover both monetary and injunctive relief in enforcement actions.
In CFPB v. Consumer First Legal Group, LLC, the CFPB filed an enforcement action in 2014 in which it alleged that the defendants violated Regulation O while providing mortgage-assistance relief services by making misrepresentations about their services, failing to make mandatory disclosures, and collecting unlawful advance fees. The district court ruled that the companies had committed the substantive violations alleged by the CFPB and that the lawyer defendants could be held personally liable for such violations and were not exempt from Regulation O because the work they completed did not qualify as the “practice of law.” It ordered restitution in the amount of $21.7 million, assessed civil penalties totaling $34.1 million allocated among the four lawyers and a civil penalty of $3.1 million against one of the companies, and permanently enjoined three of the lawyers from providing debt relief services.
While affirming the defendants’ liability on the substantive violations alleged by the CFPB, the Seventh Circuit vacated all aspects of the district court’s remedial order. The district court’s restitution award was based on the defendants’ “net revenues” during the relevant period, meaning gross receipts minus any refunds issued. The Seventh Circuit concluded that based on the U.S. Supreme Court’s decision in Liu v. 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 concluded that disgorgement 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 disgorgement, stating that Liu’s reasoning was “not limited to disgorgement and purported to set forth a rule applicable to all categories of equitable relief, including restitution.”
With regard to civil penalties, the district court had concluded that three of the lawyers had acted recklessly with respect to their violations, the fourth lawyer was liable for his violations only under a strict liability theory, and the company had committed reckless violations. The CFPA established three tiers of penalties: strict-liability violations at $5,000 per day; reckless violations at $25,000 per day; and knowing violations at $1 million per day. The defendants argued that they were not aware of a risk that their conduct was illegal because Regulation O prohibits conduct that is commonplace for lawyers, such as requiring advance retainer payments. They also argued that because Regulation O is a complicated regulatory regime, their violations resulted from misunderstanding the regulation’s applicability rather than recklessness.
The Seventh Circuit concluded that although their conduct did not constitute the “practice of law,” it was “a step too far to say that they were reckless—that is, that they should have been aware of an unjustifiably high or obvious risk of violating Regulation O.” (emphasis provided). Accordingly, the Seventh Circuit vacated the district court’s recklessness findings with respect to the three lawyers and the company and directed the district court, on remand, to apply the daily penalty for strict-liability violations. The Seventh Circuit also agreed with the defendants that the district court had used incorrect time periods to calculate the amount of the penalties and directed 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 lawyers permanently banned from providing debt relief services argued that the record did not support such a broad injunction and that it would create undue hardship for them as career bankruptcy lawyers. Having found the defendants’ violations were not knowing or reckless, the Seventh Circuit concluded that such a broad injunction “is not necessary to protect the public against future harm.” It also observed that the companies were out of business and “were not a complete scam,” having obtained mortgage modifications for hundreds of consumers. The Seventh Circuit ruled that the injunction “need only ensure that the individual defendants do not stray beyond the scope of the [CFPA] and its implementing regulations.”
More industry players have been litigating cases with the CFPB over the past few years, and decisions like this seem to suggest that litigating with the Bureau is sometimes necessary, especially when there is a significant mismatch between the Bureau’s and the industry member’s view of appropriate remediation. We believe there is every reason to predict more Bureau cases going to litigation, reinforced by decisions like this, which make the prospect of litigating a CFPB enforcement matter seem more attractive to enforcement targets.
An Illinois federal district court has ruled that Section 19 of the FTC Act provided an alternate route for the FTC to obtain restitution after its prior restitution award under Section 13(b) of the FTC Act was vacated by the Fifth Circuit because it concluded that monetary relief is not available under Section 13(b).
In FTC v. Credit Bureau Center, LLC, the FTC filed suit against Credit Bureau Center (CBC) for operating a website that offered a free credit report and score but automatically enrolled consumers who applied for the free information in a credit monitoring service for a monthly fee. The FTC alleged that the website’s marketing and negative option feature violated the FTC Act’s UDAP prohibition and the Restore Online Shopper Confidence Act (ROSCA). The district court granted judgment in favor of the FTC, issued a permanent injunction, and ordered CBC to pay over $5 million in restitution.
On appeal, the Seventh Circuit affirmed the permanent injunction, but vacated the restitution award after holding that Section 13(b) does not authorize monetary relief. (The U.S. Supreme Court granted the FTC’s petition for a writ of certiorari and the case was meant to be consolidated with AMG Capital Management v. FTC but the Supreme Court vacated the grant of certiorari. Subsequently, in AMG, the Supreme Court ruled that Section 13(b) does not authorize the FTC to seek monetary relief such as restitution or disgorgement.) Following AMG and the Seventh Circuit’s issuance of its mandate, the FTC filed a motion with the district court in its action against CBC to amend the judgment to reimpose the same restitution under Section 19 and ROSCA.
Section 18 of the FTC Act authorizes the FTC to issue rules defining acts or practices that are unfair or deceptive. If a rule promulgated under Section 18 is violated, the FTC can seek “legal and equitable remedies, including restitution, from violators” under Section 19 of the FTC Act. Section 5(a) of ROSCA allows the FTC to enforce ROSCA by treating violations of ROSCA as violations of a rule promulgated under Section 18.
The FTC filed its motion to amend the judgment under Rule 59(e) of the Federal Rules of Civil Procedure, which requires the moving party to “clearly establish a manifest error of law or an intervening change in the controlling law or present newly discovered evidence.” The FTC asserted that it could seek monetary relief for ROSCA violations under Section 19, a provision it did not cite in its complaint. It also contended that because Section 5(a) of ROSCA incorporates all of its enforcement authority under the FTC Act, the FTC had not only put CBC on notice about the factual basis for its ROSCA claim and the remedy sought (i.e. restitution), but also implicated an alternative route for seeking that remedy. According to the FTC, it was entitled to the same redress awarded in the prior judgment but under ROSCA and Section 19 rather than Section 13(b).
In response to the FTC’s motion, CBC asserted a number of counterarguments, including that the court could not amend its prior judgment because the Seventh Circuit’s mandate did not permit any further proceedings, the FTC law of the case doctrine precluded the FTC from pursuing relief under an alternative statute, the FTC had waived monetary redress under Section 19 by pursuing such relief under Section 13(b), and unfair prejudice because the FTC had not specifically invoked Section 19 in its complaint.
The district court agreed with the FTC that the Seventh Circuit’s mandate did not preclude it from granting the same relief under Section 19 that it had previously granted under Section 13(b) because the Seventh Circuit did not address whether the FTC could pursue monetary relief under Section 19. It also rejected all of CBC’s other arguments and concluded that “because the complaint sufficiently tied the FTC’s factual allegations and claims for relief to the ROSCA violation, the invocation of section 5(a) of ROSCA was enough to put CBC on notice about ‘the methods of enforcement and nature of relief available under Section 19.” The district court stated that it was “persuaded that it has the authority to amend the prior judgment under Rule 59(e) due to the intervening change in the law” and amended its prior judgment to award the same consumer redress under ROSCA and Section 19.”
For cases that involve violations of FTC rules, such as the Telemarketing Sale Rule and rules implementing the Children’s Online Privacy Protection Act, or statutes such as ROSCA that include language treating a statutory violation as a violation of a consumer protection rule under the FTC Act, the FTC can be expected to continue to file actions in federal district court seeking either consumer redress under Section 19 or civil penalties under Section 5(m)(1)(A) of the FTC Act. For cases that do not involve rule violations (i.e. cases only alleging UDAP violations), in order to obtain monetary redress, the FTC will need to first establish the respondent’s UDAP liability in the administrative action (and any appeals), before it can seek monetary relief in federal district court pursuant to Section 19.
- Kim Phan
The U.S. Court of Appeals for the Sixth Circuit recently ruled that the unconstitutionality of the 2015 TCPA amendment that created an exception to the robocall restriction for calls made to collect debts owed to the federal government did not invalidate the plaintiff’s claims for TCPA violations based on robocalls he received in 2019 and 2020 advertising utility services.
The TCPA was amended in 2015 to create an exception from the TCPA’s robocall restriction for calls made “solely to collect a debt owed to or guaranteed by the United States.” In 2020, in Barr v. American Association of Political Consultants, the U.S. Supreme Court ruled that the exception violated the First Amendment of the U.S. Constitution. The Court also decided that the proper remedy for the constitutional violation was to sever the exception from the remainder of the TCPA, thereby making calls to collect government debts subject to the TCPA’s robocall restriction and otherwise leaving the restriction in place for any other calls to which it applied.
In Lindenbaum v Realgy, LLC, the plaintiff filed a putative class action lawsuit alleging violations of the TCPA’s robocall restriction based on two robocalls he received from the defendant in late 2019 and early 2020 advertising electricity services. After the Supreme Court’s decision in American Association of Political Consultants (AAPC), the district court granted the defendant’s motion to dismiss. It concluded that because severance of the exception in AAPC only applied prospectively, the entire TCPA robocall restriction was unconstitutional from the date of the 2015 amendment until the Supreme Court severed the 2015 amendment. As a result, according to the district court, the TCPA could not provide a basis for federal jurisdiction for alleged TCPA robocall violations arising before the exception was severed.
In reversing the district court’s dismissal, the Sixth Circuit ruled that AAPC applied retroactively to invalidate the government debt exception but did not render the entire TCPA robocall restriction void until the exception was severed in AAPC. According to the Sixth Circuit, in AAPC, the Supreme Court “recognized only that the Constitution had ‘automatically displace[d]’ the government-debt-collector exception from the start, then interpreted what the statute has always meant in its absence.” Accordingly, the TCPA robocall restriction remained in place as if the exception never existed.
The Sixth Circuit also rejected the defendant’s attempt to invoke the First Amendment as a defense based on its argument that because government debt collectors would have a due process defense to liability for robocalls made before AAPC, holding the defendant liable for pre-AAPC robocalls “would create the same content-discriminatory system that the Court held unconstitutional in AAPC.” According to the Sixth Circuit, “the centuries-old rule that the government cannot subject someone to punishment without fair notice is not tied to speech.” In its view, “[w]hether a debt collector had fair notice that it faced punishment for making robocalls turns on whether it reasonably believed that the statute expressly permitted its conduct. That, in turn, will likely depend in part on whether the debt collector used robocalls to collect government debt or non-government debt.”
On September 21, in a party line vote of 49-48, the Senate voted to advance Rohit Chopra’s nomination to serve as CFPB Director from the Senate Banking Committee to consideration by the full Senate. (The Committee had voted 12-12, also along party lines, which meant the Senate received Mr. Chopra’s nomination without a recommendation by the Committee.) Three Senators did not vote on the advancement of Mr. Chopra’s nomination to full Senate consideration: Republican Senators Burr and Rounds and Democratic Senator Feinstein.
Senate Majority Leader Schumer can now be expected to move to invoke cloture, which would be followed by a final confirmation vote that observers believe could happen as soon as next week. Assuming all Senate Democrats vote for his confirmation, Mr. Chopra’s confirmation would be assured since Vice President Harris could break a tie.
The CFPB has released its first in-depth report analyzing complaint submission patterns throughout the credit life cycle, by demographic characteristics.
The findings are based on the approximately 1 million consumer complaints that were submitted to the CFPB between 2018 and 2020. To prepare the report, the CFPB matched address information from complaints to census tracts. The credit life cycle categories used for the Bureau’s findings are loan origination, servicing of performing loans (performing servicing), delinquent and distressed servicing and collections (delinquent servicing), and credit reporting.
Key findings include the following:
- Census tracts with the greatest share of Black or African American residents submit the most complaints per resident.
- Lower income census tracts and census tracts with a greater share of minority residents submit more complaints about credit reporting, delinquent servicing, and identity theft.
- For communities with relatively high incomes, complaints about originations and performing servicing are relatively more common and complaints about credit reporting and delinquent servicing are relatively less common.
- Census tracts with the highest share of white, non-Hispanic residents submit complaints about loan originations at more than twice the rate as census tracts with the highest share of Black or African American residents.
- Lower income census tracts (those at or below 40% of their area’s median income) submit about 30% more complaints per resident than census tracts at about 100% of their area’s median income.
Based on these findings, the CFPB makes the following observations:
- Consumers from communities with lower incomes and higher shares of Black or African American residents and Hispanic or Latino residents submit complaints about past financial issues and identity theft victimization. In contrast, communities with higher incomes and a greater share of white, non-Hispanic residents tend to submit complaints about current issues they are having with lenders and servicers.
- The different experiences of these communities suggest that structural differences in access to credit are important in determining what kinds of complaints the CFPB receives. The submission of complaints about loan origination by white, non-Hispanic consumers at more than twice the rate of Black or African American consumers likely reflects differences in access to credit, with differences in complaints about mortgages playing an outsized role.
- Past barriers limiting access to mainstream credit for racial minorities, the long-term impact of the 2008 mortgage crisis, and continued inequality in access continues to shape the opportunities available to consumers.
- The growing gap between communities with higher white, non-Hispanic populations and/or higher incomes and communities with higher minority populations and/or lower incomes is especially concerning. It suggests that new credit, especially mortgages and mortgage refinances, may be disproportionately available to consumers from communities with higher incomes and a greater share of white, non-Hispanic residents.
Scottsdale, AZ | October 4-6, 2021
Fair Housing and Fair Lending During the Biden Administration
Speaker: Richard J. Andreano, Jr.