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Financial Services Law Insights and Observations

7th Circuit denies CFPB’s request to reconsider attorney exemption in foreclosures

Courts CFPB Appellate Seventh Circuit Regulation O Enforcement Mortgages U.S. Supreme Court Liu v. SEC


On November 29, the U.S. Court of Appeals for the Seventh Circuit denied the CFPB’s petition for panel or en banc rehearing of its earlier decision in an action taken against several foreclosure relief companies and associated individuals accused of violating Regulation O. As previously covered by InfoBytes, the Bureau asked the appellate court to reconsider its determination “that practicing attorneys are categorically exempt from Regulation O,” claiming that the court’s holding strips the Bureau “of the authority given it by Congress to hold attorneys to account for violations not just of Regulation O, but of a host of other federal laws as well.” In July, the 7th Circuit vacated a 2019 district court ruling that ordered $59 million in restitution and disgorgement, civil penalties, and permanent injunctive relief against defendants accused of collecting fees before obtaining loan modifications, and inflating success rates and the likelihood of obtaining a modification, among other allegations (covered by InfoBytes here). The appellate court based its decision on the application of the U.S. Supreme Court’s ruling in Liu v. SEC, which held that a disgorgement award cannot exceed a firm’s net profits—a ruling that is “applicable to all categories of equitable relief, including restitution.” The appellate court also concluded that attorneys who are subject to liability for violating consumer laws “cannot escape liability simply by virtue of being an attorney.” However, the appellate court vacated the recklessness finding in the civil penalty calculation pertaining to certain defendants, writing that “[a]lthough 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.” (Covered by InfoBytes here.) In its appeal, the Bureau did not challenge the vacated restitution award, but rather argued that a rehearing was necessary to ensure that the agency can bring enforcement actions against attorneys who violate federal consumer laws, including Regulation O.