An appellate court has vacated a $59 million judgment against two former mortgage relief service providers and their principals the Consumer Financial Protection Bureau (CFPB) sued for alleged foreclosure relief scams.
The CFPB filed suit against the Mortgage Law Group (TMLG) and Consumer First Legal Group (CFLG) in 2014 under then-bureau Director Richard Cordray.
The case is Consumer Financial Protection Bureau v. Consumer First Legal Group LLC et al (Seventh Circuit Court of Appeals, No. 19-3396).
The complaint alleged the companies took in more than $19.2 million in fees from more than 10,000 distressed homeowners nationwide, with most, if not all, of that money coming from illegal advance fees for so-called loan modification services. The CFPB also accused the companies of failing to make required disclosures.
“Appellants urge us to vacate all aspects of the remedial order,” Seventh Circuit Court of Appeals Judge Diane Wood wrote in her majority opinion. “They argue that the restitution order was legally erroneous because it exceeded the firms’ net profits. They also contend that the court’s civil penalties were excessive because they were based on a miscalculation of the penalty period and on an erroneous finding that appellants acted recklessly. Finally, they assert that the district court’s injunction was over-broad. We agree with appellants on all three points.”
Both TMLG and CFLG have ceased operations, but the CFPB sought redress for consumers harmed by their practices and permanent injunctive relief against the principals, Thomas Macey, Jeffrey Aleman, Jason Searns and Harold Stafford.
In 2019, The Western District of Wisconsin found TMLG, Macey, Aleman and Searns jointly and severally liable for $18,716,725.78 for the advance fees that TMLG collected from consumers.
CFLG, Macey, Aleman and Searns were ordered to pay $2,897,566 for the advanced fees CFLG II collected from consumers. Stafford and CFLG were found liable for $94,730 in restitution for the advanced fees that CFLG collected from consumers.
In addition, civil penalties were assessed as follows: Macey, $11.3 million; Aleman, $14.7 million; Searns, $8 million; Stafford, $35,250; CFLG, $3.1 million.
The lower court also granted the CFPB’s injunction request. Macey, Aleman, Searns and CFLG were barred permanently from the mortgage assistance relief business in any capacity. Stafford was banned for five years.
The three-judge Seventh Circuit panel remanded the case back to the Western District to recalculate penalties. Circuit judges Frank Easterbrook and Amy St. Eve concurred.
The defendants took issue with the district court’s conclusion that Macey, Aleman, Searns, and Consumer First II recklessly violated the Consumer Financial Protection Act.
“Appellants insist that they were not aware of a risk that their conduct was illegal, nor should they have been, because Regulation O prohibits conduct that is commonplace for lawyers, such as requiring advance retainer payments and providing advice not to communicate with opposing parties,” Wood added. “They also maintain that because Regulation O is a complicated regulatory regime, their violations were more a product of misapprehending the regulation’s applicability than of recklessness. Finally, they point to a legal opinion they received; that opinion informed them that their structure qualified as a national law firm. They contend that this opinion led them to believe they would be exempt from Regulation O.
“Appellants have a point. Although we have found that they were not engaged in the practice of law, the question was a legitimate one. We consider it 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. We thus vacate the district court’s recklessness finding with respect to Macey, Aleman, Searns, and Consumer First II. On remand, the district court must apply the penalty structure for strict-liability violations.”
The suit was one of three filed by the CFPB in connection with a nationwide sweep against foreclosure relief scammers who used deceptive marketing tactics to rip off distressed homeowners across the country. The Federal Trade Commission filed six lawsuits in the sweep, and 15 states filed a total of 32 actions.