FYI: 9th Cir Rejects Challenge to CFPB Enforcement Authority

In a split decision, the U.S. Court of Appeals for the Ninth Circuit recently affirmed, in part, summary judgment in favor of the Consumer Financial Protection Bureau (CFPB) in an enforcement action against a law firm operating as a loan modification company.

In so ruling, the Court rejected the attorney loan modification company's argument that the CFPB was without authority to commence an enforcement action before its Director was properly nominated and confirmed.

A copy of the opinion is available at:  Link to Opinion

The defendant, a licensed California attorney, operated a law firm that offered home loan modification services to consumers.

In July 2012, the CFPB filed a civil enforcement action against the defendant alleging that he violated the Consumer Financial Protection Act (CFPA) by suggesting to consumers that his loan modification program was affiliated with the government and by implying that consumers would likely obtain mortgage relief.

The CFPB further alleged that the defendant violated Regulation O (12 C.F.R. §§ 1015.1-11) by, among other things, accepting up-front payment for mortgage relief services before negotiating loan modification agreements with the consumers' lenders.

The CFPB sought a permanent injunction, restitution, and disgorgement of compensation. The CFPB also sought and obtained a temporary restraining order to appoint a receiver, freeze Defendant's assets, and prohibit the defendant from operating his business.

In June 2013, the district court entered summary judgment in favor of the CFPB and ordered $11,403,338.63 in disgorgement and restitution.

On appeal, the Ninth Circuit first considered whether the CFPB had standing to bring the civil enforcement action. To bring a case, a private litigant must have more than a general grievance or an interest in seeing the law obeyed. But because the Constitution authorizes the Executive Branch to enforce federal law, its duly appointed officers are exempted from the "concrete and particularized injury" requirements that private parties face under Article III. Thus the Court examined whether the CFPB had authority, as part of the Executive Branch, to bring the enforcement action in July 2012.

The defendant argued that the CFPB did not have a validly appointed director until July 2013, when its director was confirmed by the Senate. For support, the defendant cited NLRB v. Noel Canning, 134 S.Ct. 2550 (2014), in which the Supreme Court held that the President's recess appointments to the National Labor Relations Board did not satisfy Article II's Appointment Clause requirements because they did not occur when the Senate was out of session. The President's initial appointment of the CFPB's director occurred on the same day in 2012 and in the same manner as the NLRB appointments at issue in Canning.

According to the defendant, because his initial appointment was invalid, the Director lacked authority to initiate a civil enforcement action in July 2012. And, to continue that argument, if the Director did not have authority to bring the enforcement action then the CFPB could not stand in the shoes of the Executive Branch for purposes of Article III standing. 

In rejecting this argument, the Ninth Circuit explained that while the failure to have a properly confirmed director might raise Article II Appointments Clause issues, it would not deprive a court of its Article III jurisdiction to hear a case. The Court examined a number of cases in which the Supreme Court described Appointments Clause questions as nonjurisdictional and concluded that: "no court, including the Supreme Court, has ever suggested that Article II problems nullify Article III jurisdiction." The Ninth Circuit panel then held that the director's subsequent valid appointment, along with his August 30, 2013 ratification of all actions taken while he was serving as a recess appointee, cured any Article II deficiencies.

The Ninth Circuit then turned to the merits of the CFPB's case against the defendant. The Court found that the defendant's marketing mailer was deceptive because it suggested an affiliation with the United States government. Among other things, the mailer bore the Equal Opportunity Housing logo and stated that it was a "Notice of HUD Rights." The CFPB also submitted evidence that consumers were deceived by the mailer.

The defendant argued that he could not be held responsible for the marketing materials because they were developed by another entity, which settled with the CFPB earlier in the litigation. But the Court found that the defendant's position was contradicted by evidence demonstrating the defendant's control over, and approval of, the marketing materials at issue. The Court also rejected the defendant's arguments that the representations in the marketing materials were mere "puffery" and that any deceptive practices were corrected by the consumer agreements, which accurately described the services offered.

The Ninth Circuit likewise upheld the district court's finding that the defendant violated Regulation O. The defendant argued that he was not a "mortgage assistance relief service provider" subject to Regulation O because he did not provide mortgage relief services in exchange for consideration. To the contrary, he argued, consumers were only charged for custom legal products and any loan modification services were provided as part of a pro bono program. The Court characterized this as an "obvious attempt to evade the requirements of Regulation O." Even though the defendant's contracts with consumers described the loan modification services as pro bono, the Court concluded that those services were only available to consumers who paid for the legal products.

Turning to the district court's $11,403,338.63 judgment for disgorgement and restitution, the Ninth Circuit rejected the defendant's arguments that the district court should not have included fees paid by satisfied consumers, fees refunded by the defendant to consumers, or fees paid by consumers who were not deceived by the fraudulent marketing materials.

The Court was, however, receptive to the defendant's argument that the district court improperly calculated the monetary judgment by including the time period prior to the effective dates for Regulation O and the CFPA. The Ninth Circuit thus vacated this part of the district court's decision and remanded for the district court to consider whether money earned by the defendant prior to the effectiveness of Regulation O and the CFPA should be included as part of the monetary judgment.

Lastly, the defendant argued that the district court abused its discretion in ordering injunctive relief because it was not clear that the violations were ongoing or likely to recur. Specifically, the defendant asserted that he had no desire and ability to continue to assist distressed homeowners and that this created a factual dispute sufficient to deny the injunction.

The Ninth Circuit found that the record, in particular evidence that the defendant evaded and complicated the investigatory process, supported the district court's injunctive relief. The Ninth Circuit also found that the district court carefully considered the scope of the injunction and tailored it to match the risk of harm identified and minimize the impact on the defendant's business, pointing to the district court's rejection of the first proposed injunction as too broad because it would unduly limit the defendant's ability to engage in lawful employment without providing corresponding benefit to consumers.

The dissent took issue with the majority's analysis of the standing issue, concluding instead that because the director was not properly appointed at the time the enforcement action was commenced, the CFPB lacked executive power and was thus without Article III standing. The dissent further provided that because Article III standing must exist at the time a complaint is filed, the director's subsequent ratification of actions taken during his recess appointment was insufficient to cure the CFPB's lack of standing. The dissent concluded that the district court was obligated to dismiss the enforcement action for want of jurisdiction.

Eric Tsai
Maurice Wutscher LLP 
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