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CFPB secures $12 million after decade-old complaint against foreclosure relief scam company
On February 8, the CFPB announced the resolution of an enforcement action, begun in 2014, against a foreclosure relief operation that allegedly violated Regulation O. After a decade of court orders, opinions, and appeals, on February 5, 2024, the defendants and the CFPB jointly agreed to the dismissal of their respective appeals and on February 7, 2024, the Seventh Circuit dismissed the parties’ appeals. The final settlement required the defendants to pay $10.9 million in consumer redress and a $1.1 million penalty. The enforcement action notes that the defendants remain “subject to the bans” under the district court’s 2022 order.
The CFPB had alleged that the defendants violated Reg. O by taking payments from consumers for (i) mortgage modifications before they signed an agreement from their lender; (ii) failing to make required disclosures; (iii) directing consumers not to contact lenders; and (iv) making deceptive statements to consumers. As previously reported by InfoBytes, the CFPB and the Florida Attorney General obtained a judgment against this group in May 2015 for parallel violations.
Agencies extend Regulation O relief for some companies controlled by funds
On December 15, the Fed, FDIC, and the OCC announced the issuance of an interagency statement to further extend the “Extension of the Revised Statement Regarding Status of Certain Investment Funds and their Portfolio Investments for Purposes of Regulation O and Reporting Requirements under Part 363 of FDIC Regulations.” The original statement was issued on December 22, 2022, with an expiration of January 1, 2024. The new interagency statement effectively extends the prior no-action position (covered by InfoBytes here) until either January 1, 2025 or the effective date of amendments to Regulation O that addresses the treatment of extensions of credit by a bank to fund complex–controlled portfolio companies that are bank insiders.
The agencies noted that they will refrain from acting against banks extending credit to complex-controlled portfolio companies that would otherwise violate Regulation O, provided the company controls (directly or indirectly) less than 15 percent of the bank’s voting securities (or 20 percent under certain circumstances) and does not plan to place representatives or exercise a controlling influence over the bank. Additionally, the agencies will not pursue action against insured depository institutions for failing to report credit extensions that would violate Regulation O but fall under the interagency statement’s coverage. The agencies explained how credit extensions must be on “substantially the same terms as those prevailing for comparable transactions with unaffiliated third parties” and may not “involve more than normal risk of repayment or present other unfavorable features.”
Agencies extend Reg. O relief for some companies controlled by funds
On December 22, the Federal Reserve Board, FDIC, and OCC extended Regulation O relief for certain investment fund-controlled companies. The agencies issued a temporary no-action position in 2019 to allow time for the Federal Reserve, in consultation with the FDIC and OCC, “to consider whether to amend Regulation O to address concerns about unintended consequences of the application of Regulation O to companies that sponsor, manage, or advise investment funds and institutional accounts that invest in voting securities of banking organizations.” The interagency statement extends the no-action relief under Regulation O for another year to the sooner of either January 1, 2024, or the effective date of a final Federal Reserve rule revising Regulation O “that addresses the treatment of extensions of credit by a bank to fund complex-controlled portfolio companies that are insiders of the bank.” Specifically, the agencies state that action will not be taken against banks extending credit to fund complex-controlled portfolio companies that would otherwise violate Regulation O, provided the company controls (directly or indirectly) less than 15 percent of the bank’s voting securities (or 20 percent under certain circumstances) and has not or does not plan to place representatives in the bank or seek to exercise a controlling influence over the bank. Extensions of credit to these companies must be on “substantially the same terms as those prevailing for comparable transactions with unaffiliated third parties” and may not “involve more than normal risk of repayment or present other unfavorable features,” the agencies explained, noting that the relief applies only to fund complex-controlled portfolio companies, not the fund complexes.
FTC, DFPI shut down operation offering mortgage relief
On September 19, the FTC and the California Department of Financial Protection (DFPI) announced a lawsuit against several companies and owners for allegedly operating an illegal mortgage relief operation. (See also DFPI’s announcement here.) The filing marks the agencies’ first joint action, which alleges the defendants’ conduct violated the California Consumer Financial Protection Law, the FTC Act, the FTC’s Mortgage Assistance Relief Services Rule (the MARS Rule or Regulation O), the Telemarketing Sales Rule, and the Covid-19 Consumer Protection Act. The agencies claimed that the defendants preyed on distressed consumers with false promises of mortgage assistance relief. According to the complaint, the defendants made misleading claims during telemarketing calls to consumers, including those with numbers on the National Do Not Call Registry, as well as through text messages and in online ads. In certain cases, defendants represented they were affiliated with government agencies or were part of a Covid-19 pandemic assistance program. Among other things, defendants falsely claimed they were able to lower consumers’ interest rates or payments, and instructed consumers not to pay their mortgages, leading to late fees and significantly lower credit score. Defendants also allegedly told consumers not to communicate directly with their lenders, which caused consumers to miss default notices and face foreclosure. Additionally, defendants charged consumers illegal up-front fees ranging from $500 to $2,900 a month, and told consumers they were negotiating loan modifications that in most cases never happened.
The U.S. District Court for the Central District of California granted a restraining order temporarily shutting down the defendants’ operations. In freezing the defendants’ assets and ordering them to submit financial statements, the court noted that the agencies established a likelihood of success in showing that the defendants “have falsely, deceptively, and illegally marketed, advertised, and sold mortgage relief assistance services.”
CFPB gets $29.2 million judgment in mortgage relief suit
On August 1, the U.S District Court for the Western District of Wisconsin granted over $29.2 million to the CFPB, revising a $59 million judgment that was thrown out by the U.S. Court of Appeals for the Seventh Circuit last year. As previously covered by InfoBytes, in July 2021, the 7th Circuit vacated a 2019 restitution award in an action brought by the CFPB against two former mortgage-assistance relief companies and their principals (collectively, “defendants”) for violations of Regulation O. In 2014, the CFPB, FTC, and 15 state authorities took action against several foreclosure relief companies and associated individuals, including the defendants, alleging they made misrepresentations about their services, failed to make mandatory disclosures, and collected unlawful advance fees (covered by InfoBytes here). The district court’s 2019 order (covered by InfoBytes here) held one company and its principals jointly and severally liable for over $18 million in restitution, while another company and its principals were held jointly and severally liable for nearly $3 million in restitution. Additionally, the court ordered civil penalties totaling over $37 million against company two and four principals.
According to the recent opinion and order, the district court concluded that it would be “appropriate” to characterize the redress as legal restitution because the “plaintiff’s claim is against defendants generally and not one, identifiable fund or asset,” calling it “valid and necessary” for consumers to be compensated for the advance fees they paid. Instead of ordering “complete restitution,” the district court noted it would require the defendants to “refund 50% of the moneys paid, which plaintiff shall return directly to the injured parties to the extent practical,” because the 7th Circuit “found that defendants' conduct was not the product of reckless disregard of the CFPA, but rather a failure to fit themselves under an exception for the delivery of legal services.”
Fed updates Regulation O FAQs
On July 8, the Fed updated its frequently asked questions (FAQs) regarding Regulation O, Loans to Executive Officers, Directors, and Principal Shareholders of Member Banks (12 CFR Part 215). The Fed clarified that a bank’s payment of premiums as part of a split dollar life insurance arrangement does not constitute as an extension of credit to an insider, provided that certain conditions are met. The agency noted that, “under a split dollar life insurance arrangement, a bank pays the premiums on a policy insuring the life of an employee of the bank. Split dollar life insurance arrangements can take many forms. For example, the insurance policy can be owned by the bank, the employee, or a third party (typically a trust).” The Fed further explained that “[r]egardless of form, the bank is entitled to receive from the proceeds of the insurance policy a pre-negotiated amount upon the death of the insured or when the insured surrenders the policy.”
Fed updates legal interpretations related to several regulations
On December 30, the Federal Reserve Board added several new frequently asked questions related to legal interpretations of the Board’s regulations, including Regulations H, O, W, and Y, as well as questions concerning covered savings associations. The Fed noted that, unless specified, the FAQs are staff interpretations and have not been approved by the Board. Future revisions or supplements may be released as necessary or appropriate.
- Regulation H: Five new FAQs discuss (i) branch closing procedures and required notices; (ii) the ability to conduct branch activities should a bank relocate its main office; (iii) when a bank may acquire a debt obligation under its general powers to lend under state law; and (iv) public welfare investments made by state member banks involving housing projects with multiple residential buildings.
- Regulation O: A revised FAQ states that banks may not offer discounts on loan origination fees to an insider if the discount is not available to members of the public with one exception: a bank is not prohibited from “extending credit to an insider as part of a benefit or compensation program that (i) is widely available to employees of the member bank and (ii) does not give preference to any insider of the member bank over other employees of the member bank.”
- Regulation W: Thirty-four new FAQs address various topics related to (i) provisions concerning nonaffiliate and affiliate lending and extensions of credit under the attribution rule; (ii) valuation and timing principles; (iii) revolving credit facilities and loan commitments involving nonaffiliates; (iv) asset purchases from affiliates; (v) a bank’s acquisition of another company’s shares and liabilities; and (vi) exemptions.
- Regulation Y: Nine new FAQs discuss (i) circumstances under the Bank Holding Company Act (BHC Act) where “a bank or company that holds bank shares in a fiduciary capacity [would] be considered to have sole discretionary authority to exercise voting rights”; (ii) tying restriction qualifications, exceptions, and safe harbor; (iii) factors considered in the acquisition of bank securities or assets; (iv) trustee powers; (v) filing requirements for persons acquiring ownership or control of shares; (vi) appraisal standards for federally-related transactions; and (vii) rules for engaging in an activity that is complementary to a financial activity. The Fed notes that while these FAQs refer at times to bank holding companies, the FAQs are also applicable to foreign banking organizations that are subject to the BHC Act in the same manner as a bank holding company under the International Banking Act of 1978.
- Covered Savings Associations: Twenty-nine new FAQs address topics related to covered savings associations (CSAs) and companies that control a CSA pursuant to Section 5A of the Home Owners’ Loan Act. Among other things, the FAQs address (i) the scope of Section 5A; (ii) a CSA’s membership in the Federal Reserve System; (iii) filing requirements; (iv) requirements applicable to a CSA or a company controlling a CSA, as well as mutual CSAs and mutual holding companies controlling a CSA; (v) transactions involving a CSA or a company controlling a CSA; and (vi) the termination of an election to operate as a CSA.
7th Circuit denies CFPB’s request to reconsider attorney exemption in foreclosures
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.
CFPB petitions 7th Circuit to reconsider Regulation O attorney exemption
On October 7, the CFPB filed a petition for panel or en banc rehearing with the U.S. Court of Appeals for the Seventh Circuit, asking the appellate court to reconsider its recent determination “that practicing attorneys are categorically exempt from Regulation O,” as it strips the CFPB “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.” (Covered by InfoBytes here.) In 2014, the CFPB, FTC, and 15 state authorities took action against several foreclosure relief companies and associated individuals, alleging that they made misrepresentations about their services, failed to make mandatory disclosures, and collected unlawful advance fees (covered by InfoBytes here). A ruling issued by the district court in 2019 (covered by InfoBytes here) ordered nearly $59 million in penalties and restitution against several of the defendants for violations of Regulation O, but was later vacated by the 7th Circuit based 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.” (Covered by InfoBytes here.)
In its appeal, the Bureau did not challenge the vacated restitution award, but rather argued that a rehearing is necessary to ensure that the agency can bring enforcement actions against attorneys who violate federal consumer laws, including Regulation O. “The panel’s conclusion. . .threatens to disrupt the existing federal regulatory scheme for multiple consumer laws and expose ordinary people across the country to an increased risk of harm from illegal practices,” the Bureau stated, adding that 12 U.S.C. § 5517(e) does not limit the Bureau’s ability to pursue a civil enforcement action against practicing attorneys who are subject to Regulation O. According to the Bureau, Paragraph 3 of § 5517(e) states that the limitation on the Bureau’s authority “‘shall not be construed’ to limit the Bureau’s authority with respect to an attorney ‘to the extent that such attorney is otherwise subject’ to an enumerated consumer law or transferred authority.” The Bureau asked the 7th Circuit to reconsider its decision on this issue or, in the alternative, withdraw that portion as unnecessary to the outcome.
7th Circuit vacates $59 million CFPB penalty against mortgage-assistance relief companies
On July 23, the U.S. Court of Appeals for the Seventh Circuit vacated a 2019 restitution award in an action brought by the CFPB against two former mortgage-assistance relief companies and their principals (collectively, “defendants”) for violations of Regulation O. As previously covered by InfoBytes, in 2014, the CFPB, FTC, and 15 state authorities took action against several foreclosure relief companies and associated individuals, including the defendants, alleging they made misrepresentations about their services, failed to make mandatory disclosures, and collected unlawful advance fees. The district court’s 2019 order (covered by InfoBytes here) held one company and its principals jointly and severally liable for over $18 million in restitution, while another company and its same principals were held jointly and severally liable for nearly $3 million in restitution. Additionally, the court ordered civil penalties totaling over $37 million against company two and four principals.
In 2021, the principals urged the 7th Circuit to vacate the judgment, arguing, among other things, that the restitution order used the company’s net revenues instead of net profits in determining restitution and that they were exempt from liability because Regulation O exempts properly licensed attorneys engaged in providing mortgage-assistance relief services as part of the practice of law, provided they comply with state law and regulations. The principals also disagreed with the district court’s finding that they acted recklessly in calculating the civil penalty amount, contending that “they were not aware of a risk that their conduct was illegal.”
The 7th Circuit reviewed 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 (covered by InfoBytes here). While the Bureau argued that Liu focused on disgorgement and not restitution, the appellate court held that the Bureau’s interpretation was “too narrow a reading of Liu.” According to the appellate court, “Liu’s reasoning is not limited to disgorgement; instead, the opinion purports to set forth a rule applicable to all categories of equitable relief, including restitution.” The appellate court vacated the restitution award and remanded the suit for recalculation based on net profits.
With respect to the alleged violations of Regulation O, the appellate court affirmed the district court’s ruling, concluding 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 of the 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.” The appellate court ordered the district court to apply the penalty structure for strict-liability violations. Additionally, the 7th Circuit remanded an injunction which permanently banned the principals from providing “debt relief services,” finding that the injunction requires “some tailoring” as the violations at issue involved mortgage-relief services and not debt-relief services.