An appeals court has vacated a $59 million judgment in a lawsuit brought by Consumer Financial Protection Bureau against two mortgage repair firms and their attorney-founders.
The U.S. Court of Appeals for the Seventh Circuit last week threw out the restitution award imposed on the Mortgage Law Group and the Consumer First Legal Group in 2019. The case, which could challenge the CFPB's restitution authority, was sent back to the lower court to recalculate penalties.
A three-judge panel for the appeals court determined that the appropriate measure for restitution should be calculated based on a company’s net profits, not revenue, which could affect other CFPB cases, experts said.
Yet the panel also upheld part of the lower court’s ruling by finding that the two now-defunct law firms misled consumers into thinking they would receive legal representation when applying for mortgage assistance. The ruling was first reported by Law 360.
The Constitution's Eighth Amendment prohibits the federal government from imposing excessive bail, excessive fines or cruel and unusual punishments.
“The penalties originally assessed by the court were really huge,” said Scott Pearson, a partner at Manatt. “The case raises the important question of whether the CFPB’s penalty authority violates the Eighth Amendment.”
The case dates back to 2014 when the CFPB sued the two law firms and their four attorney-owners alleging they made misrepresentations about their services, failed to make mandatory disclosures to consumers and collected unlawful advance fees.
The two firms provided mortgage-assistance relief services after the financial crisis to more than 6,000 customers in 39 states. The firms collected roughly $3,375 per customer to cover the submission of an initial loan-modification application.
The appeals court upheld the CFPB’s findings that the four attorneys did not provide legal representation to the consumers.
In 2019, District Court Judge William Conley awarded a $59 million judgment against the two firms’ bankruptcy estates. The district court had assessed millions in penalties against the individual lawyers based on a finding of recklessness, which carries penalties of $25,000 per day, versus strict-liability violations that carry penalties of $5,000 per day.
The judge found that three of the four lawyers associated with both law firms acted recklessly, while a fourth was liable for violations under strict liability.
The firms appealed, arguing that a 2017 Supreme Court decision that limited the scope of equitable relief available in a Securities and Exchange Commission civil enforcement action applied to the CFPB’s ability to collect restitution.
The CFPB declined to comment.
