CHICAGO — A federal appeals panel has ordered a federal judge to recalculate how much two mortgage firms owe in penalties for misleading homeowners into believing they could help escape foreclosure during the Great Recession’s housing crisis.
In November 2019, U.S. District Judge William Conley, of the Western District of Wisconsin, ordered Mortgage Law Group and Consumer First Legal Group — and four associated lawyers, Thomas Macey, Jeffrey Aleman, Jason Searns and Harold Stafford — to pay a combined total of $59 million as the result of a civil enforcement action the Consumer Financial Protection Bureau initiated earlier in the decade. The CFPB said the firms, which had more than 6,000 customers in 39 states, misrepresented services, didn’t make mandatory disclosures and unlawfully collected advance fees.
Consumer First, Macel, Aleman and Searns challenged Conley’s judgment before the U.S Seventh Circuit Court of Appeals, arguing they were practicing law and shouldn’t have been subject to CFPB rules applied to mortgage lenders. Alternatively, they said the evidence didn’t support the three violations for which Conley found them liable. They also maintained restitution should be calculated based on net revenues, not net profits, took issue with a finding of recklessness used to determine civil penalties and said an injunction was too broad.
Seventh Circuit Judge Diane Wood wrote the panel’s opinion, issued July 23; Circuit Judges Frank Easterbrook and Amy St. Eve concurred.
According to the panel, Consumer First and the lawyers argued for their attorney exemption from CFPB regulation before the bench trial began, but failed to prove they qualified. Although the firms employed four or five lawyers at their Chicago headquarters, and had associations with local attorneys in other states, the bulk of the work was the domain of “‘client intake specialists’ who enrolled customers, gathered the necessary documents for modification applications, reviewed those documents, answered consumer questions and submitted loan-modification applications to lenders.”
Each customer paid an initial retainer of $1,000 to $2,000 with recurring monthly fees of $500 to $1,000, but that money covered only loan modification work. Other services, including “legal representation in a foreclosure proceeding or bankruptcy proceeding,” were subject to additional fees.
Conley’s decision, Wood explained, was that the CFPB could pursue the penalties applicable to mortgage lenders because the targeted attorneys weren’t doing legal work. When the firms involved local attorneys, that “involvement consisted primarily, and in most cases exclusively, of pro forma document review” and that “the role of the local attorney was by design almost always perfunctory, rather than substantive,” according to Conley.
The panel also examined Conley’s determination the firms and lawyers were engaged in the behavior that rooted the CFPB’s enforcement action. After agreeing with Conley in that regard, the panel turned to the civil penalties, which included a permanent injunction barring Macey, Aleman and Searns from providing debt relief services.
A 2020 U.S. Supreme Court opinion in Liu v. SEC held that a disgorgement award can’t exceed a firm’s net profits, Wood wrote, compelling the panel to vacate a $21.7 million restitution award that was calculated based on net revenues, not profits. The panel further said that although they agree the defendants weren’t engaged in law, “we consider it a step too far to say that they were reckless” and remanded the case for a penalty structure in line with strict-lability violations.
The panel also sided with the lawyers and firms on their timetable for monetary penalties that accrued based on how long violations persisted, saying penalties for enrollment violations should’ve ended in the fall of 2012 instead of stretching into January 2013. Those also must be recalculated.
Finally, Wood wrote, Conley’s injunction was overreaching because the “mortgage-relief operations, though undoubtedly flawed in many respects, were not a complete scam: at the end of the day, the Mortgage Group and Consumer First did in fact obtain loan modifications for hundreds of customers during their roughly two years of operation. Those firms have long since gone out of business and so the injunction” only needs to make sure the lawyers avoided mortgage relief, not debt relief as a whole, which would allow them to keep working as bankruptcy attorneys.